Why did the government force Richard Branson into a merger he opposes?

Originally published at Rare

Virgin America is an offshoot of British entrepreneur Richard Branson’s Virgin Atlantic airline. Known for its distinctively customer-focused brand and fun aesthetic, Virgin America has operated in the United States since 2007 and has gained a loyal following. So when it was announced this week that Virgin America would be merging with Alaska Airlines, many people were disappointed.

One such person was Branson himself.

As he wrote at Virgin’s website:

I would be lying if I didn’t admit sadness that our wonderful airline is merging with another. Because I’m not American, the US Department of Transportation stipulated I take some of my shares in Virgin America as non-voting shares, reducing my influence over any takeover. So there was sadly nothing I could do to stop it.

Admittedly, I wasn’t familiar with this particular regulation until I heard this story. And it turns out that it’s exactly the kind of protectionist nonsense Branson cited in his piece about Virgin America’s history, which includes initial difficulties entering the market due to a regulatory environment meant to stifle competition.

“The commitment to create a truly guest-focused airline and the dedication and will to make it happen – through some of the most challenging economic times and anti-competitive obstacles – has resulted in a financially successful business that achieved record profits last year,” wrote Branson.

He also says that Virgin injected a new competition into the airline market that forced other carriers to improve their service.

“When Virgin America launched, fleetwide WiFi was considered a radical idea,” said Branson. “[S]o was touch-screen entertainment at every seat, and brand new and beautifully designed cabins. Airlines have had to invest in better products to try to compete. That is a testament to the entire Virgin America team.”

Isn’t this precisely what the free market should be about? In theory, yes. But unfortunately, federal regulations, especially the extremely onerous ones that permeate the transportation industry, have made airline travel in the United States a more difficult proposition than it has to be.

As Branson notes, “Today, the four mega airlines control more than 80 per cent of the US market. Consolidation is a trend that sadly cannot be stopped.” Unfortunately, many people wrongfully attribute this problem to capitalism. But as is the case in so many areas of business, the airline industry is rife with regulations that yield government-mandated monopolies. This leads to lower quality options for consumers, while a few well-connected politicians and corporations benefit.

Writing at the New York Times in 2012 about the issue that Virgin America is now facing, the Brookings Institution’s Clifford Winston explained why there’s no good reason to restrict foreign airlines the way the United States does:

[A]llow foreign airlines, including discount carriers like Ryanair and global players like Qantas and British Airways, to serve domestic routes in the United States. Why, after all, should an industry that has ingeniously used free-market principles to squeeze the most revenue out of each middle seat be protected from competing in a real free market?

Sadly, in the nearly four years that have passed since Winston made those observations, the anti-competitive regulatory environment hasn’t improved.

Hopefully, as supporters of more competition, lower prices, and better service are affected by these regulations, we can lobby to have them changed. Richard Branson’s platform will certainly help draw attention to the issue. And regardless of the outcome for Virgin America, U.S. consumers will continue to feel the squeeze if the regulatory environment remains as is.

As Winston aptly says, “By allowing foreign airlines to serve American domestic markets, the process of creating a truly free market in airline services here would be complete and, as in the case of international markets, would provide travelers the benefit of more flight choices and lower fares.”

That’s something we should all support.

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